Explaining Greenium in a Macro-Finance Integrated Assessment Model
76 Pages Posted: 28 May 2021 Last revised: 29 Dec 2021
Date Written: May 27, 2021
How do firms' environmental performances affect cross-sectional expected stock returns? Using a third-party ESG score, I find that greener stocks have lower expected returns. This greenium remains significant after controlling for systematic and idiosyncratic risks. Green stocks hedge climate-related disasters, contributing to the greenium. A macro-finance integrated assessment model featuring time-varying climate damage intensity, recursive preferences, and investment frictions quantitatively explains the empirical findings. The model implies a positive covariance between climate damages and consumption, which justifies a high discount rate and a low present value of carbon emission.
Keywords: Climate finance, macro-finance, asset pricing
JEL Classification: G12, Q43, Q5
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